Question: Will I pay income tax when the money in my 529 plan is withdrawn to pay for college expenses?

Answer :

If the money you withdraw from a 529 plan (college savings plan or prepaid tuition plan) is used to pay qualified education expenses, then you won't owe federal income tax on the earnings portion of your withdrawal. However, depending on the state you reside in, you may owe state income tax, even if the withdrawal is used to pay qualified education expenses. So check the laws of your state. Keep in mind that withdrawals for purposes other than qualified education expenses will be subject to normal federal income tax treatment and may be subject to an additional 10 percent federal income tax penalty.

Note: Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing. More information about 529 plans is available in each issuer's official statement, which should be read carefully before investing. Also, before investing, consider whether your state offers a 529 plan that provides residents with favorable state tax benefits.